Goldman Sachs' controversial move to cut pay to 2009 levels may be fraught
with all sorts of legal problems.

Cutting pay to save jobs has become a common theme in recent years. Manufacturers started it; accountancies and other private sector firms followed suit. Employers have been praised for not shedding staff numbers too heavily during the recession – unlike previous downturns – so that when things did pick up, they still had their best workers to hand.

Goldman Sachs’ decision to cut the raised City salaries handed to bankers two years ago is likely to go down disastrously with staff, however. Invoking a clause in their contracts, without any consultation, to lower pay back to 2009 levels will not wash with many of those who feel they have already had to take a massive hit to their bonuses.

Lawyers warn that Goldman Sachs will be open to legal challenge from disgruntled bankers, who could argue that forthcoming pay cuts would be imposed “irrationally” and/ or breach a duty of mutual trust between the employer and employee.

The downturn in market conditions, which inevitably led to the bank’s decision to lower base pay, may keep some bankers quiet for now. But Richard Fox, a lawyer at City law firm Kingsley Napley, says as soon as the market picks up “competitive” bankers who believe they deserve more from their job could bring a claim to court.

Mr Fox says the clause in workers’ contracts, which supposedly allows the bank to cut pay, is extremely rare. Although many big banks inserted a clause in workers’ contracts to raise base pay in 2009, as a compromise for reducing bonus pots, Mr Fox says Goldman Sachs was “very clever” to also write another clause allowing it to reverse that decision.

Related Articles

Two other investment banks are understood to have similar clauses in their contracts, and if Goldman Sachs manages to pull this off without endless legal bills and other problems then a suite of other banks will doubtlessly follow suit.

But Mr Fox said those other banks will, for now, watch closely how things unfold at Goldman Sachs, typically seen as the benchmark for pay in the industry.

“Normally what happens in one bank gets transferred very quickly. I’d be very surprised if other banks don’t have this clause … you can see the advantage of it.

“Banks now have a big fixed price for an employee and a big fixed salary. But if the market doesn’t improve in their favour then they will have to enforce this [clause].”

However, he adds: “Employees will want to keep their heads down, but the minute the market starts to turn then we will have employees that want to challenge the decision.”

Goldman Sachs has announced 1,000 job cuts globally in recent months.

Analysts believe other banks that do not have a similar clause to Goldman Sachs may have to shift to lower salaries the hard way.

Matthew Czepliewicz, an analyst at Collins Stewart, says: “Banks are going to have to ratchet back compensation ratios, and gradually bring salaries down again.

"They can do this with new hires, new promotions, leading to a blended washing out of fixed pay rises."

Some industry surveys have already shown salaries for new starters dipping. Recruiters Morgan McKinley said the average salary for those securing new roles in July fell 3pc from a year ago, the first decrease in many months.